Research Unbundling Gains Steam

Shanny Basar

Vicky Sanders, co-founder at RSRCHXchange, a marketplace for institutional research, said it has become normal for fund managers to set research budgets as Woodford, the UK manager, said it will start paying for research itself.

Woodford said in a statement yesterday that from 1 April investment research costs are being paid by Woodford, rather than by the fund, with no increase to the existing annual management fee. “We also commit to greater transparency on the total cost of investing, with all transaction costs to be disclosed monthly on our website,” added the firm.

Dealing commissions for fund investors have historically combined both researching the investment decision and the cost of execution. Woodford said that last year research costs were 0.02% of the fund’s net asset value to investors, based on the fund’s average size during the year. “This number will slowly reduce over the next 12 months, and will disappear completely by April 2017,” added the firm.

Under the incoming MiFID II regulations, covering financial markets in Europe from 2018, the European Securities and Markets Authority has proposed that asset managers provide more transparency to investors by separating costs for research and execution. Fund managers will be required to either pay for research out of their own revenues or set up research payment accounts for clients with an agreed budget – although Esma may still allow asset managers to use commission sharing arrangements. The proposal has led to fears that fund managers will cut their research budgets, with smaller firms particularly hard hit, while small and mid-cap corporates will get less coverage.

Sanders said in an email to Markets Media: “Woodford’s announcement brings welcome attention to research unbundling. The setting of research budgets has been quietly ticking along in the background and has now become the norm.”

Alistair Haig, Early Career Fellow in Finance at the University of Edinburgh Business School, said on RSRCHXchange’s blog that Woodford has taken a bold step and follows Legal and General’s announcement to increase fees on active funds earlier in the year. Legal & General Investment Management said that from this month it would unbundle trading and research commissions and give each of its active equity funds a defined research budget. In addition both firms reduce regulatory uncertainty by not waiting for the final MiFID II regulations and the individual responses from European member state regulators.

Haig said that in a recent paper with Bill Rees, a colleague from the University of Edinburgh Business School, they found that fund managers are striving hard to make the most of the investment research they obtain from external parties. “Rather than bundling research they are working hard to obtain a wider choice of research, better value for money, greater independence and exclusivity. This has led to increasing demand for independent research,” he added.

However Haig also warned that Woodford’s approach suits niche fund managers who are highly self-sufficient but could be more difficult for larger asset management groups who may continue to use a combination of ‘hard’ cash payments for research, commission sharing arrangements and MiFID II research payment accounts.

Sanders said: “I agree with Alistair’s comments that hard dollar payments work well for some funds while commission sharing arguments or research payment accounts will better suit others. On RSRCHX we still see the overwhelming majority of purchases made with CSAs.”

RSRCHX is the name of RSRCHXchange’s research platform. The firm launched last year as an online marketplace for fund managers to buy institutional research and now has more than 125 multi-asset research providers on the platform. Fund managers can pay by subscription, purchase individual reports with cash, use commission sharing arrangements or the new MiFID II research payment accounts – and meet the enhanced record-keeping requirements by measuring and monitoring consumption.

Feature image by Apinan/Dollar Photo Club

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